Next year thegovernment enters a new and dangerous phase. Slow growth is hurting, but that's not the most pressing problem. In 2013 the third phase of austerity kicks in and is likely to prove the most controversial issue for middle and low income voters.

We've had the tax rises and the public sector job cuts. Now we must brace ourselves for the loss of key benefits.

Until Thursday night, with the public finances seriously off-track, it looked like welfare cuts, which already make up 80% of the government's austerity programme, would need to increase by at least £10bn. The chancellor, George Osborne, flagged up the need for a tighter public spending settlement during the budget in March and earned a rebuke from the welfare secretary, Iain Duncan Smith, for his trouble.

Since the spring, government spending has risen and tax revenues have declined, leaving the Treasury in a worse position and in need of even more cuts.

By some estimates the government will need to find up to £25bn of cuts by next April to stay within its target.

Such a monumental hit to welfare spending would spell the end of the coalition government. With cuts to housing benefit, tax credits, child benefit and disability benefit already in the pipeline, Osborne has hinted on limits to annual rises in jobseekers' allowance and other unemployment-related benefits. Pensions, already cut in successive years after a shift from the higher retail prices index to the consumer prices index measure of inflation, are the biggest budget item and could be next.

How could the Liberal Democrats countenance further attacks on the poor and key middle income voters. Even Tory MPs are wary of deeper spending restrictions ahead of what is likely to be a difficult election in 2015. Osborne's promise was to get the worst out the way by the end of this financial year, leaving the way clear for some pre-election giveaways.

That is no longer possible, leaving the coalition staring into the middle distance, unable to move.

Enter Sir Mervyn King. Like a lifebuoy thrown to a drowning man, he splashed down with a message that could support the coalition through the next couple of years.

He told Channel 4 News on Thursday that worrying about the deficit was a fool's game when growth was low. Europe can be blamed for the UK's low growth. It is not of the chancellor's making. So it would only be fair that the chancellor be allowed to abandon his targets. They were made in better times when growth would expand tax receipts and solve unemployment.

King's revisionism will annoy many who have long argued that debt targets should be relaxed when growth is flat, or negative as in the last three quarters. He has proved a cheerleader for Osborne every time someone questions Plan A.

To be fair, rejecting the need for extra welfare cuts is not the same as calling for a stimulus package, but King's intervention will prove important for the economy and the coalition. If he had maintained a hard line, given his influence and capacity to offer political cover for economic policy decisions, the coalition would be pushed apart, with the Tories forced to maintain deeper austerity to meet their targets and Lib Dems forced to bail out.